Enron Japan Government & Regulatory Affairs Update 15 May 2001

1. Enron Japan Government & Regulatory Affairs Update 15 May 2001

2. POLITICAL SITUATION

3. Government Policy Continues Towards Reform • Prime Minister Koizumi appointed on reformist platform • Continued regulatory reform likely • No sudden changes or reversals of policy • Pro - US Yamasaki moves to Secretary General • Reformist Taro Aso moves to Chairman of LDP Policy Council • Kamei remains as Chairman of LDP Energy Policy council • Position to be upgraded: implications of energy policy on regional security • Energy now on G8 agenda • Kamei seeking closer co-operation with US

4. Prime Minister Elected on Pro-reform Agenda • Pro-reform LDP president candidate Koizumi unexpectedly won the vote for LDP president becoming the Prime Minister. • Victory due to obvious regional party support affecting the party vote • Public expect much from his reform platform • Support by public rated at 87% • Continues to declare reform agenda in Parliament after election • Shift economic policy to structural reform • Clear bad loans held by banks (150 trillion yen) • Limit issuance of Government bonds

5. Ability to Reform in Question • Koizumi already criticized for lack of ideas about how to implement his reforms. • Power base in LDP is small • Koizumi’s faction not a strong proponent of reform • Upper house July election may LDP Factions Prime Minister Koizumi Mori Faction 60 Anti-Reform Pro-Reform Hashimoto Faction 102 Secretary General Yamasaki Yamasaki Faction 23 Eto-Kamei Faction 55 Horiuchi Faction 43 Kato Faction 15 Non-aligned 23 Komoto Faction 13 Kono Faction 12

6. REGULATORY ENVIRONMENT

7. METI Seeking Means to Continue Public Deregulation Debate • METI seeking to promote debate with utilities • Criticized as too close to Enron • Realization that little power without utilities • Focus on deregulation through distributed generation • Interim regulatory review pushed back to “late” August • Policy makers at METI want deregulation but need support • Believe in need to restructure energy industry • Without political leadership, METI can’t make the big steps • Believe they don’t have regulatory jurisdiction needed to create immediate changes • See their jurisdiction to effect long-term change through approval of utility supply plans but don’t have sufficient political will to required to change past practice • Lack expertise in electricity industry • Very limited staff, quick turnaround

8. Electricity Deregulation Phase III : 2002-2003? • The advisory committee responsible for electricity deregulation stated in its January 1999 report that the current system should be reviewed three years after implementation (March 2003) • The electric utilities have publicly repeated their view that the next review should begin after three years, not before then. • TEPCO has signed an agreement with PJM to study the market. Their intention is spend four years or more studying issues and thereby delaying the deregulatory process. Utilities are trying to create image of an unreliable Enron and E-Power to discredit our activities. • METI is dissatisfied with current level of competition and wishes to advance process • METI will begin review process in Summer 2001 with a view to promoting much wider competition with greater transparency from March 2003 • Despite exploitation of California problems by utilities, METI remains in favour of deregulation, referring to the California problems as a design issue not a competition issue • Without greater resources in METI, independence of regulatory view is impossible.

9. Gas Deregulation Phase III : 2002-2010? • METI has shifted to pro-deregulation position on gas industry after negative approach last year. • METI’s Gas Deregulation Study Committee has finished a preliminary review of the issues to be studied, including all of Enron’s concerns. • Sub-committees have been set up to study infrastructure development, open access, transmission access, etc. • METI’s goal is create a vision for the gas market in ten years time. • Development of non-existent pipeline infrastructure is METI’s biggest concern • Gas industry anti-deregulation, afraid of Enron, or at least image of Enron painted by incumbent monopolies. • In addition to large players, anti-reformist policies are supported by the 30 thousand or more tiny community monopoly suppliers, with strong ties to LDP • METI has been voicing opinion that Enron should negotiate for 3rd party access to LNG terminals before demanding regulated open access.

10. Progress in Fair Trade Issues Partial Supply

11. Partial Supply: the Issue METI’s Public Position • METI has stated publicly that partial supply can be provided under the current supply arrangements and the utility must provide rates based on their standard tariff for liberalized users. Utility Behaviour • Enron, E-Power other new entrants continually face the same issue up and down Japan. • Utilities refuse to offer a price to customers because they state problems exist regarding load following. Contentious Issue • Utilities objections hang on a clause in the utilities Wheeling Terms and Conditions New entrants must be able to supply power to meet user’s demand changes. • METI has said this clause can refer to flat base load. The supplier need only to provide supply to meet customer base load. • The utilities argue that the spirit of the law requires new entrants to accept responsibility for customer load following. • No clear rules for implementation

12. Fair Trade Issue: Current Situation • Regulatory Action • Initial meetings between Fair Trade Commission (JFTC) and Enron were non-committal and in favour of utilities. (JFTC cannot interfere in ongoing negotiations. It is difficult to say that delaying negotiations can be interpreted as “refusing to engage in negotiations.“ • Issue clouded by different partial supply issue brought by another new entrant • Fair Trade Commission lacks expertise and required considerable education from METI on partial supply • Customer’s commitment to talk to FTC created sudden change in TEPCO • TEPCO provided price & customer now favourable to contracting for base supply with Enron on former 10% deal. • After fact, JFTC says informally that TEPCO’s delaying of process would be sufficient to begin action under Anti-monopoly Law. • Precedent of utility providing partial supply price less than standard price has been set

13. Proposed LDP Basic Energy Law

14. What the Proposed Bill Says Ostensibly Business as Usual • Stable energy supply is paramount • Environmental protection must be achieved • Market mechanisms are needed to provide economic benefits and lower prices for consumers. Issues • Market mechanisms are subordinated to stable supply and CO2 reduction policies. • Implication is made that market mechanisms endanger stable supply and CO2 reduction policies. • Bill is clearly electric utility language and seeks concessions for energy forms that cannot be stored, ie. electricity. • Bill was drafted by LDP Upper House Member who was former TEPCO VP in charge of environmental issues and nuclear siting. • Why now?

15. Enron Approach • Action Required • Both energy committees in LDP are much influenced by incumbent electricity and gas utilities • Supervisory committee is headed by pro-reform Kamei but all other members are anti-reform. • Kamei is only pro-reform member on the supervisory committee. • Kamei is looking to kill the bill, which he sees an electricity industry interest bill. • Enron providing support to point out that this bill is unnecessary directly, via new entrants and through U.S. Government. • Next Stage • Kamei’s intention is to shelve the bill by losing it in the review process • Change in political situation has slowed down process • Original plan to table bill in this session of Parliament not likely • If tabled, then next year is possible

16. E-Power Regulatory Issues

17. Review of Basic Processes • Need to address the fundamentals • Permits required for construction and operation of power plants and related facilities • Time needed to obtain those permits and to seek agreement of local groups • Ability to access the transmission network at the preferred sites in a timely and cost effective manner • Implications of Japan's deregulating market on forward power prices • Permitting process set up for 10 – 15 year development cycle by utilities • Current indications are that permitting will take 7 years and transmission connection 10 years • Comprehensive regulatory review has commenced • Lobbying strategy will be developed to address each of the barriers to timely development

18. Transmission Access • Chugoku Electric (Ube) has advised that it will take approximately 10 years and in the order of US$200m to connect to the grid. Tohoku Electric (Aomori) is looking at a similar time frame • E Power must bear the cost of connection if determined to be a private line • Construction undertaken by the utility • Connection point determined by system stability and capacity • Ownership of the line remains with the utility • If connection considered common use • Utility pays up to 5000 yen/kw. If insufficient, E Power pays the balance: 90 – 590 yen/kw/100 meters • Ownership of the line remains with the utility • Enron reviewing connection rules and developing dynamic model of transmission system to address system stability and capacity issues

19. Environmental Permitting Process • Plants over 150MW require environmental permits – typically a three year process • Multiplicity of laws need to be complied with • Air Pollution Control Law • Environmental Impact Assessment Law • Public Transportation Law • Gas Business Law • Water Pollution Prevention Law • Noise Regulation Law • Vibration Regulation Law • Urban Development Law • National Land Usage Law • Others • Multiplicity of agencies need to be deal with • METI • Ministry of Environment • Prefecture Governments and City or Village Governments

20. Other Permits and Approvals • Plant design Approval under Electricity Law - METI • After the Environmental Impact Assessment • Plant must comply with several laws including: Pressure Containing Parts/Vessel law, Fire Prevention Law etc. • EPC contractor and turbine type need to be determined for METI design review • Change of Port Use Plan – Ministry of National Land and Transportation • Commences after Design approval • 4 - 5 year approval process • Urban Development Permit – METI • Required if plant is constructed on Government owned land • Not required by EPCOs and EPDC • Others • Construction permit • Compensation for loss of fishing rights – uncertain cost and time